CLIENT ALERT: IRS’s Use of Artificial Intelligence in Tax Enforcement

On March 24, 2026, the Government Accountability Office (“GAO”) released GAO-26-107522, a detailed assessment of the IRS’s use of artificial intelligence. The report confirms that the IRS is deploying AI at a rapidly expanding scale across audit selection, fraud detection and broader compliance operations. GAO also identified significant workforce, inventory and governance gaps that may impact how effectively those tools are deployed. While the IRS is experiencing significant workforce reductions and budgetary uncertainty, taxpayers involved in high-value or complex transactions should take note of the issues raised in the report that warrant careful attention now.

According to the GAO, as of June 2025, the IRS maintained 126 active AI use cases, up from just 10 in August 2022, with 61% of those use cases still in development. These AI-assisted models analyze tax returns, assess them for noncompliance risk and recommend cases for audit or investigation. Related oversight reporting indicates that the IRS is also using AI-assisted models to screen large partnership returns (those with $10 million or more in assets), replace legacy systems for mid-market corporate returns ($10-$250 million in assets), and identify issues in individual returns. Although these tools are in relatively early stages of development and their effectiveness is still being evaluated, the direction seems clear: AI-driven enforcement is becoming a more important part of IRS case selection and compliance activities.

Taxpayers structuring current or contemplated transactions should be aware that document consistency and coherence in filings may be more critical than ever. It is possible that positions that may not have attracted attention historically could now surface in subsequent audit cycles. Taxpayers should keep contemporaneous support for certain facts and circumstances, such as business purpose and economic substance. Taxpayers should also consider whether valuation support and the consistency of reporting positions across related filings are sufficiently robust for this developing environment.

GAO further noted that the IRS is using AI more broadly to review large volumes of tax and other data and to help identify returns at higher risk of noncompliance. For returns already under examination, the IRS’s AI tools could be supplementing the examining agent’s analysis. Taxpayers should not assume that the scope of inquiry will remain limited to initially identified issues. For open years not yet under audit, the GAO report confirms that the IRS is using AI tools to identify noncompliance issues in filed returns on an ongoing basis, not only at the point of filing. Taxpayers should consider whether a proactive review is warranted, including evaluating the strength of existing documentation and the advisability of filing amended returns or protective claims where appropriate.

The full scope and effectiveness of the IRS’s AI capabilities remain uncertain, and the GAO report noted significant governance gaps and incomplete inventories. GAO also made eight recommendations to the IRS, including recommendations addressing AI workforce planning, quality assurance for AI inventory entries, and reporting on how AI use cases align with strategic goals and performance outcomes. The IRS agreed with those recommendations. Even so, taxpayers should be aware of the enhanced detection and prioritization capabilities now available to the IRS and should consider whether review by tax counsel is appropriate, considering their particular facts and circumstances.

Please contact the Olshan attorney with whom you regularly work or the attorney listed below if you would like to discuss further or have questions.

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